Bank cuts its growth forecasts for British economy next year

The Bank of England today slashed its growth forecasts for Britain and warned the global economic outlook had worsened.

The risk of the economy contracting in the first nine months of next year has increased, it admitted.

The Bank cut its central growth estimate to just one per cent for both 2011 and 2012 from previous forecasts of about 1.5 per cent and 2.2 per cent respectively.

Bank of England governor Sir Mervyn King said: "There will be weakness in the economy over the next few quarters and although no one can know what the outcome will be thereafter we expect the economy to pick up.

"We have seen slow but positive growth over the past year. We think that once the adjustment in the eurozone area gets through these difficulties, it will pick up again."

In its inflation report, the Bank said: "The prospects for the UK economy have worsened."

It warned that a failure to tackle the eurozone crisis would hit the UK, saying that there was no meaningful way to quantify the most extreme outcomes.

But other economists believe that the Bank is still being over-optimistic with its forecasts for Britain.

However, millions of families whose budgets have suffered because of high inflation, now at five per cent, were given a glimmer of hope. The Bank predicted that inflation is likely to fall far quicker than previously estimated, hitting the Government's two per cent target in the second half of next year before falling to as low as about 1.3 per cent in 2013.

Sir Mervyn added that the "journey to a more balanced world economy will be long and arduous".

He said UK economic activity will be broadly flat until the middle of next year.

A Treasury spokesman said: "The Government is doing all it can to protect the UK economy and make sure that it remains a relative safe haven in the face of international instability and uncertainty, while also putting in place the longer term conditions needed for strong and sustainable growth."

The Bank warned that the debt crisis in the eurozone remained the "single biggest risk" to the UK recovery.

Sir Mervyn said: "If there were to be a sharp downturn in the euro area, then our banks would be affected by it."

The Bank also signalled that it may pump more money into the economy, having already put in £275 billion, to combat the threat of a second recession.